The Master System battle was hard-fought, and supporting its library nearly alone turned SEGA's internal R&D into a towering software factory, banging on all cylinders. They were tough-as-nails, and though the Master System was defeated, SEGA had just begun. The wonderful thing about the game industry is that no empire lasts forever.

Though Nintendo's market share had swelled to near total dominance, their business – and by proxy the industry itself – was shrinking by the end of the '80s. We now know this is the generational tide of the gaming industry, but Nintendo's next generation system was still years away from being ready. The time had come for SEGA to strike back.

The moment to pounce was fleeting. NEC launched a much-publicized 16-bit system with Hudson Soft in 1987, and it would eventually make its way abroad, leaving SEGA with a narrow window before they'd have to risk battling another juggernaut. To maintain their competitive edge (and stay on a tight schedule) they leveraged the biggest asset they had: their arcade division.

SEGA had been on the cutting edge of 16-bit hardware for years, and its most successful board was the versatile System 16 that powered games like Golden Axe and Altered Beast. Their goal was to build a consumer console based on the System 16, while maintaining backward compatibility with their previous system (though this required an adapter in the final spec). After brainstorming nearly 300 names, they finally dubbed their home arcade the "Mega Drive."

The Japanese launch arrived just before Halloween in 1988. It was a bust. Super Mario Bros. 3 had released just one week earlier, and it seemed that all of Japan's gamers were too busy exploring the Mushroom Kingdom to notice SEGA's new system. The console's first year was not a complete flop, but the 400,000 units they sold were far from a smashing success. Next year would be different, or so they believed.

"Hyakumandai!" That was the chant Hayao Nakayama made his executives chant. "One million units!" They had laid out their goal and repeated it every day. Their new system arrived in the US in the summer of '89 with the Christian-friendly name Genesis, and the occult-friendly pack-in Altered Beast. It was time for SEGA of America to get back in the game, and they needed a new leader to guide them.

Michael Katz was a no-nonsense pragmatist, who had been through more than enough ups and downs in the videogame business. He worked at Mattel during Intellivision's heyday, and Coleco during their console venture. When he first encountered SEGA's new console, he was working at Atari. Having closed their American branch for a time after selling Master System to Tonka, SEGA was looking for an American partner and hoped Atari might be interested in getting in the 16-bit game. Katz was interested, but Jack Tramiel was famously cynical about the console market and wanted no part of it. SEGA moved on to release the system themselves, but they had found just the person to spearhead their effort.

Katz was named President of SEGA of America one month after the Genesis' launch, and given his initiative to sell one million systems in the next coming year. As a realist, he didn't know or particularly care if that goal could be achieved. His only interest was to do the best job he could. At the time, SEGA's biggest problems were advertising, third-party support, and a lack of games catered to the Western audience. Katz devised a plan to deal with all three.

SEGA couldn't get big third-party franchises on their system, since Nintendo had their licensees under lock and key. To get the star power they needed, they decided to license celebrities instead. Katz felt that sports games would be key to winning over the American audience, especially with the increasingly large young adult demographic. Their first high-profile signing was with San Francisco 49ers quarterback Joe Montana. The deal netted the football star $1.7 million, and proved to be worth every penny. Soon after, Tommy Lasorda and Evander Holyfield joined the SEGA team, along with the King of Pop, Michael Jackson.

After their first development deal for their flagship football game fell through, they needed someone who could turn a gridiron game in a hurry, so they turned to a small developer named Electronic Arts, located not far from SEGA's American headquarters. EA was hardly the giant we now know them as, and were, in fact, not in very good financial shape. They needed the money and with their young John Madden Football franchise already in development for the system, they had a good base to work from. Of course, EA put a bit more love into their own pigskin sim, and Joe Montana Football shipped late, but SEGA could hardly feel bad about having two massively successful football games on their system. "I don't regret [EA developing Joe Montana for SEGA] at all," remarks former SEGA of America CEO Tom Kalinske, "but I love teasing [former EA CEO] Larry Probst and [EA founder] Trip Hawkins by saying 'If it hadn't been for me and SEGA, you guys would all be out of business.'"

SEGA also needed a Mario-killer; a blockbuster game with worldwide appeal. An international creative team worked to develop their new mascot, while the Japanese staff made the game itself. After experimenting with countless ideas ranging from a bulldog, to a wolf, to a spiky-haired fat man in overalls, they finally settled on a super-fast hedgehog with characteristically '90s in-your-face 'tude. Michael Katz hated the idea. He thought the average American kid wouldn't respond to an animal that most of them weren't familiar with. Seeing is believing, however, and there were few who weren't convinced upon laying eyes on the first Sonic the Hedgehog.

Lastly, SEGA needed to rethink its advertising strategy completely. Their first slogan was "We bring the arcade experience home," but that only spoke to a limited audience and side-stepped Nintendo completely. They knew they had the superior product, and they needed to make some noise about it. Katz had always been a fan of competitive advertising, and with a 16-bit powerhouse facing a veritable antique, their claims were righteous. They launched a multimedia advertising campaign proudly proclaiming "Genesis does what Nintendon't."

Hayao Nakayama's goal to sell a million units may have been a fantasy. SEGA of America was a small company of about 50 people when he joined, and much of his tenure was spent laying the groundwork for the platform's later success. It didn't matter. The Genesis had only sold 500,000 units, and Katz was taking the fall. Nakayama and Dave Rosen began looking for a replacement.